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The Fed delivered exactly what everyone expected — a 25 bp cut — and then delivered something no one expected:
a market-friendly press conference wrapped in cautious language.
On the surface, Powell signaled patience, uncertainty, and “careful assessment” heading into 2026. By the book, that should cool risk appetite.
Yet the moment Powell started talking, stocks ripped to session highs, banks surged, and rate futures eased.
So what happened?
Traders didn’t hear caution.
They heard: “No hawkish surprise. No tightening bias. No January hike risk.”
Markets weren’t rallying on what Powell said — they were rallying on what he didn’t say.
Let’s break down why a “careful” Fed produced a risk-on day.
Data: Yahoo Finance — Close of Market, Dec 10, 2025
THE BREAKDOWN:
1) Markets braced for pushback — and got none
Positioning was defensive coming into the meeting. Traders expected:
a warning about easing too fast
pushback against market pricing
a hint that cuts were “not guaranteed”
Instead, Powell said:
“I don’t think a rate hike is anyone’s base case at this point.”
That statement removed an entire scenario from the probability tree.
When expectations lean hawkish, neutral = bullish.
The S&P moved to session highs instantly.
2) The Fed quietly upgraded the growth outlook
The SEP now shows:
GDP growth 2026: 2.3% (vs. 1.8% prior)
Productivity outlook improving
Inflation drifting lower
Powell even credited AI-driven investment for supporting business spending.
A higher-growth, lower-inflation mix is the closest thing markets get to a cheat code.
Powell didn’t sound optimistic, but the projections were.
For markets, that was enough.
3) The Split Vote Actually Helped Markets
Three dissents normally scream uncertainty.
But today they told a different story:
One official wanted a bigger cut (Miran, -50 bp)
Two wanted no cut
The median stayed at “one more cut in 2026”
To traders, that distribution means:
→ cuts remain on the table
→ the committee isn’t unified against more easing
→ no one credible is pushing for hikes
Uncertainty isn’t the enemy.
Upside-tail risk is. And Powell removed it.
4) Labor Market Softness = More Insurance Cuts Later
Powell emphasized:
job growth is overstated
labor demand continues to soften
the Fed is now prioritizing employment risk more than inflation risk
His key line:
“Downside risks to employment have risen.”
When the Fed openly shifts its risk-management weight toward the labor side, it increases:
→ the probability of additional cuts
→ the willingness to ease if data deteriorates
→ tolerance for temporarily higher inflation
Markets trade probabilities, not commentary — and recession probability just went down.
5) Tariffs Are the Inflation Culprit — Not the Economy
Powell explicitly said:
“It’s really tariffs that are causing most of the inflation overshoot.”
Translation: The Fed doesn’t view inflation as monetary or structural.
It views it as political — and temporary.
That’s a green light for markets because:
inflation isn’t viewed as cyclical
it isn’t viewed as demand-driven
it doesn’t justify tighter monetary policy
If inflation isn't the Fed’s enemy, hikes aren’t its solution.
That’s why risk assets rallied:
the bar for tightening is now almost nonexistent.
THE TAKEAWAY:
Uncertainty dropped
Markets didn’t celebrate the 25 bp cut.
They celebrated the removal of uncertainty.
Powell’s message was cautious — but it confirmed the one thing traders needed:
The next move isn’t up.
When the Fed stops being a threat, risk stops being defensive.
And that’s why a measured, almost hesitant press conference ignited a risk-on rally.
The surprise wasn’t the policy move.
The surprise was the shift in expectations.
LESSON OF THE DAY:
FOMC — The Meeting That Moves Everything
The FOMC is where the Fed answers one question:
Should money get tighter or looser?
That answer sets the tone for every market.
Rate hike → liquidity shrinks, risk assets weaken.
Rate cut → liquidity expands, risk assets bid.
Hold → traders hunt for clues between the lines.
Eight meetings a year. All market-moving.
Each part of the event has its own impact:
The statement. The vote. Powell’s press conference.
- The first reaction is noise.
- The second is positioning.
- The third is the trade.
The real game is Hawkish vs. Dovish.
- Hawkish: fewer cuts ahead → strong USD, pressure on tech/crypto.
- Dovish: more cuts ahead → weaker USD, beta turns on.
Because it’s never about the rate they change today. It’s about the path they guide from here.
What traders actually reacted to was the path ahead:
→ When the next cut is likely
→ How aggressive the full easing cycle might be
→ Whether Powell sounds more worried about jobs or inflation
Today’s nuance:
- Powell didn’t cut aggressively.
- He simply removed the risk of a hike.
- That’s what ignited the rally.
How traders frame it:
→ Short-term: trade the tone.
→ Long-term: trade the path of cuts.
Right now, markets see easing… slowly… and no threats from the Fed.
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